Obama’s second term: Tackling economic woes must be his first priority

President Barack Obama meets with Speaker of the U.S. House John Boehner in Washington, D.C.

No economic issue is more important today for both Americans and Canadians than America's impending fiscal cliff. If there's no agreement between Obama and Congress by Jan. 1, a series of mandatory tax hikes and spending cuts will kick in, likely increasing unemployment by a percentage point, meaning approximately two million jobs lost and shrinking the U.S. economy by hundreds of billions of dollars.

The consequences would spread northward quickly: Less American demand for our goods, job losses in many export sectors, and lower revenues for both Ottawa and provincial capitals. Reaching a reasonable spending deal in Washington is thus crucial for both national economies and other trading partners as well.

If a responsible administration-Congress package can be finalized in time, economic growth is in fact poised to accelerate, increasing jobs and tax revenues, thus making it easier to shrink the American deficit while preserving essential spending. This would gather momentum as people return to work and partially- and fully-closed factories go back into service in the manufacturing sector, which has been to a considerable degree abandoned through several administrations in favour of importing cheap consumer goods from China.

Many American financial institutions have strengthened their balance sheets. Most households have pared their debt back to normal levels through a combination of frugality and default. Housing prices are rising in some communities. Increased consumer spending should encourage more business investment. Pent-up demand for residential and commercial construction will also help. Normalcy will return as the economy revives and the number of working, tax-paying Americans grows.

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The re-elected Obama plans to rely on spending cuts and achieving deficit reduction through higher taxes on the country's biggest businesses and wealthiest citizens. A related goal is to ensure that the benefits of economic growth reach all citizens, not just corporations and shareholders.

Obama's proposed cuts include military spending. He plans to re-invest half of the billions saved from the pullout from Iraq and Afghanistan into infrastructure, which could mean opportunities for Canadian construction companies. Because U.S. defence spending will fall below 4 per cent of Washington's total spending, Canada will face pressure to increase its own defence funding.

Working more effectively with Congress will be essential to success during Obama's second term in office. Two outstanding presidents, Abraham Lincoln and Woodrow Wilson, offer lessons. When re-elected, both put the well-being of a divided country ahead of partisanship at virtually all times. Wilson frequently went to Congress, which helped him win legislative successes on key measures, partly on the basis of good personal relationships with political opponents. This partnership has been missing for years. Obama must also overrule his current advisors and revive America's essential manufacturing sector.

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Peter Navarro, a California Democrat with a Ph.D in economics from Harvard, says that global consumer markets have been "conquered" by China largely through its cheating on trade practices. Noting the huge U.S. trade deficit with China has shuttered more than 50,000 American factories and cost more than 20 million American jobs over a decade, he says new trade legislation by all of China's trade partners could help achieve fair trade through the following:

  • All economies must refrain from illegal export subsidies and currency manipulation and abide by the rules of the World Trade Organization;
  • Define currency manipulation as an illegal export subsidy and add it to other subsidies when calculating anti-dumping and countervail penalties;
  • Respect intellectual property; adopt and enforce health, safety and environmental regulations consistent with international norms; provide decent wages and working conditions; and ban the use of forced labour with effective rather than token measures;
  • Adopt a 'zero-tolerance' policy for anyone selling or distributing pirated or counterfeit goods;
  • Effectively block contaminated food and drugs by measures which make it easier to hold importers liable for selling products that do harm;
  • Include strong provisions for protection of the natural environment in all trade agreements to reverse the 'race to the environmental bottom' in China and elsewhere.

Leslie Gelb, president emeritus of the U.S. Council on Foreign Relations, has observed:

The best thing the U.S. has going for it in Asia is the widespread and growing fear of a dynamic and muscle-flexing China. Almost all Asian nations want America as the balancer and protector against an increasingly demanding Beijing … The White House can say as much as it wants about renewing American leadership in Asia, but that talk will ring hollow unless it's backed up by a believable policy to restore the U.S. economy.

There is reason for optimism, although there are "Ifs." If Europe's debt crisis gets much worse, it could damage the U.S. financial system, which would return the harm America did to the world economy in 2008 with the Lehman Brothers meltdown. It's also possible that war in the Middle East will cause an oil shock, but no-one should allow pessimism to prevail as Obama's new term begins.

(Photo courtesy The Associated Press)

David Kilgour is co-chair of the Canadian Friends of a Democratic Iran and a director of the Washington-based Council for a Community of Democracies (CCD). He is a former MP for both the Conservative and Liberal Parties in the south-east region of Edmonton and has also served as the Secretary of State for Latin America and Africa, Secretary of State for Asia-Pacific and Deputy Speaker of the House.